Inventory Financing

Get access to revolving funds when you need it most.

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Loan Amounts

$25,000 – $10,000,000+

Terms

Revolving Credit

Rates

Starting at 7.25%

Speed

Less than 30 days

What is Inventory Financing?

Inventory financing allows you to leverage existing inventory to secure additional working capital. The amount of money you can qualify for is primarily based on the percentage of the total inventory value to be put up as collateral.

The amount of money you can borrow against your inventory varies depending on the following factors:

  • Your industry
  • Type of inventory used as collateral
  • Inventory churn

Inventory financing is commonly used by companies with large quantities of inventory, like wholesalers, retailers, construction, and more. You can use the funds for almost any business purpose, including preparing for the peak season, expanding product lines, securing additional capital to keep up with customer demand, and unlocking capital tied to unsold or unused inventory. Inventory Loans are known as inventory financing loans. Like a conventional small company loan, inventory loans are for a particular quantity that is repaid in monthly payments over a set repayment term or in one lump sum after the inventory is sold. You will be liable to repay the entire loan amount, and if you require additional funding, you will need to take out another small company inventory loan. Inventory Collateral loan defined as all inventory of the Lender and Creditor, or in which the Borrower or Guarantors have rights, as to if now purchased or hereafter acquired, wherever located, including, without restriction, all goods of the Lender and Creditor held for sale or lease or furnished or to be fully equipped under contracts of service, all goods kept for display or demonstration, goods on lease or shipment, returned and foreclosed properties goods, all raw materials, work-in-progress, all returned and repossessed goods. Inventory Collateral Loan purchases may be available from traditional banks, such as those that offer the SBA loan. They’ll appraise the worth of the merchandise you want to buy and calculate how much money you can borrow.

Types of Inventory Financing

Whereas both types of inventory financing use your inventory as security, these two loan types have significant implications for your business’s future funding.

  • Inventory Loan
  • Inventory Line of Credit

What are the Types of Inventory Used for Inventory Financing?

The most common types of inventory used for inventory financing are raw materials, works in progress (WIP), and finished goods.

These types of inventory have value, but for lenders, some are more valuable than others. The rule of thumb is that the more liquid your inventory, the higher your loan-to-value (LTV) ratio. In the event that you are unable to repay the loan, lenders will sell the inventory you placed as collateral. The easier it is for them to sell it, the higher its value.

Raw materials are generally very easy to liquidate, which makes this type of collateral an appealing form of inventory for inventory lenders to consider for collateral. As long as there is a market for the sale of the inventory products, finished goods inventory can be an attractive form of inventory to use as collateral to secure inventory financing.

However, work in progress or WIP inventory is usually not as valuable to lenders because they’re usually sold for just the melt-down or material value of the products, which could be valued at only pennies on the dollar, depending on the type of product.

Speak with our Lending Advisor Today to learn more about inventory financing!

benefits of Inventory Financing

What are the benefits of Inventory Financing?

Meet customer demand

Your business may run critically low on inventory or run out of stock during peak season. As you try to build your business as a small busines owner, the last thing ou want is to disappoint potential customers. By leveraging your unsold inventory to secure additional working capital, you can easily meet customer demand and keep your business running.

Personal collateral is not required

Conventional financing options often require you to submit personal or business assets as collateral. If this is the case, there is a risk of losing your home, car, or other personal property. Inventory financing does not require you to put up additional collateral apart from your inventory. In case you default on the loan, lenders will only repossess your inventory rather than your personal property.

Fast underwriting process

The underwriting process for inventory financing is faster compared to bank loans and other traditional financing options. Less paperwork is involved and the loan gets approved in less than a month, provided that you have all the necessary documents.

Unlock the working capital tied to unsold inventory

Small business owners have a lot of day-to-day expenses to address. It can be challenging to move your business forward when a huge chunk of your capital is tied up in unsold inventory. Inventory financing can help you unlock the working capital attached to your inventory so you can improve your cash flow. By capitalizing on inventory financing, additional funding options and credit lines remain open and are available for future use.

Structured as a revolving line of credit

In a revolving line of credit, the principal and interest payments are due when inventory churns and you can access the funds as needed. As payments are made on the loan balance, your credit goes back up. Having an inventory line of credit provides you with the ability to unlock tied up cash and not make amortizing payments.
Inventory Financing work

How does Inventory Financing work?

The Underwriting Process and Documents Needed

You’ll need the following documents to apply for inventory financing at SMB Compass:

  • 1 Page online loan application
  • At least 6 months’ worth of bank statements
  • At least 2 years in business

Note that we may ask for additional documents if needed, such as profit and loss statements, balance sheets, A/R and A/P aging reports, inventory reports, and more. Our financial experts will advise you on the documents you need to submit.

Your lender will conduct field audits and inventory valuations as a part of the funding process. This process determines the final approval and loan amount of your inventory financing line of credit.
During the field audit, the lender, or a representative on their behalf, will visit the location of the inventory to evaluate the value of the collateral that will be used to secure the funds. This audit will determine how much money the lender will offer for the inventory as collateral, and this is usually based on the amount that the inventory could be sold for in case the borrower defaults on the loan. After the reports are received and the final approval is issued, you may be able to borrow up to 80% of the appraised value of the inventory.
You will receive a term sheet that outlines the inventory loan amount, the advance rate, interest rate, and other associated fees. If you accept the terms and sign the sheet, you will need to make a deposit for the field audit and diligence.

What are the Rates and Fees for Inventory Financing?

The rates and fees for inventory financing vary depending on the following factors:

Profitability

One of the first factors that a lender will consider is your business’ profitability. Profitability refers to a business’ ability to generate more revenue over expenses. Businesses that demonstrate high profit margins and a consistent income from sales will likely qualify for inventory financing. Simply put, if a business has a higher profit margin than business expenses, it should be able to qualify for a small business loan. If you’re unable to demonstrate profitability, potential lenders might not trust that you’re able to repay the loan on time. To offset this risk, they may deny your application or increase the rates and fees.

Cash flow

Cash flow refers to the amount of working capital that a business has on hand at any given time, which can be an indicator of your business’s health. A positive cash flow demonstrates that you have the funds necessary to pay for the expenses associated with running your business, including future loan payments should you qualify for financing.

Business Credit

Businesses with poor credit history are considered riskier than other borrowers. The higher your risk level, the lower your chances of qualifying for a small business loan. And if you do qualify, lenders often charge higher rates adn fees to compensate.

A healthy credit report tells lenders that you’re keeping up with debt payments, giving them the confidence to qualify you for a loan.

Personal Credit

Sometimes, it’s not enough for a lender to see a strong business history. If the business credit is healthy, but the personal credit of the business owner is weak, a lender might not qualify the borrowing business for inventory financing. Lenders will want to see that the borrowing business owner has healthy credit in addition to the credit history of their business in order to have confidence that they will pay back the money owed.

Tax and Lien History

If you don’t have a tax or lien history or you can prove that you’ve paid off all taxes and liens, you’ll have a higher chance of qualifying for financing. If there are outstanding taxes and liens owed, this may affect your chances of securing a loan. It’s best to settle these before applying.

Inventory Churn

The inventory churn, or turnover rate associated with the inventory, will play a role in determining the terms of inventory financing. By considering the levels of inventory turnover, the rate of the goods sold, and the rate of purchasing inventory, a lender will determine the value to place on the inventory being used as collateral.

Diversity of Customer Base

Businesses that can show a reliable, consistent, diverse customer base are more likely to qualify for a small business loan with favorable rates and fees. On the other hand, businesses with limited customers or homogenous customer bases might have a harder time qualifying for inventory financing with various lenders. When applying for inventory financing, borrowing businesses will have to demonstrate their relationships with their customer base to the lender.

Quality of Inventory

In addition to the turnover of inventory and the rate of sale, the actual inventory that will be purchased itself will play a major role when determining the terms of inventory financing agreements. Specifically, the quality of the inventory plays a key role in determining the value of the inventory to a lender – the more the inventory is worth, the more the lender will offer for inventory financing. However, other factors related to the inventory itself will play a key role – like the location of the inventory (where it is stored), the ease of access to the inventory, the type of inventory, and how old the inventory is. If the inventory being purchased has a high value that will retain over time, lenders will offer more money for small business loan applicants.

Are You Eligible for Inventory Financing?

Again, the eligibility requirements may vary from lender to lender. But generally, your business should meet the following requirements to qualify for inventory financing:

Sales history

One of the factors lenders consider is your business’ previous financial and inventory records. To expedite the underwriting process, we recommend that you prepare a comprehensive report of your sales history, including inventory turnover, sales projections, and profitability. Your sales history shows lenders your capacity to repay the loan.

At least a year in business

The longer you’re in business, the higher your chances for approval because lenders will be able to see a more comprehensive sales history. If you’re running a start-up, it’s best to look for other ways to secure funding.

Provide a detailed inventory system

Lenders will want to know more about your inventory management system, particularly inventory control and movement. Prepare a detailed report outlining the shipping and product returns, sale order receipts, and other factors concerning the monitoring of your merchandise.

Is Collateral required for inventory financing?

Yes, inventory financing is a specific asset-based lending product. The collateral required for inventory financing is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.

FAQ About Inventory Financing

What is inventory financing?

Inventory financing is a specific type of asset-based financing or funding product that allows businesses to secure financing through the value of a business’ inventory to make inventory purchases. This type of funding helps the cash flow of a business by freeing up existing working capital that was being used to purchase and hold inventory. This potential to add liquidity allows businesses to capitalize on the value of their inventory. Instead of using up their working capital for inventory, businesses that take advantage of inventory financing capitalize on the value of the inventory used to keep their shelves stocked.

How do you qualify for inventory financing?

The determining factors that influence the qualifying status of a business for inventory financing are the industry that the business is in and the type of inventory that is being pledged as collateral. Lenders need to determine the value of the inventory in the event that the borrowing business is not able to pay back the loan and the inventory needs to be sold to a third party. The value of the inventory that will be purchased itself is usually what the lender uses as collateral to secure the funds – the higher the value of the inventory being used for collateral, the more money that the borrowing business will receive from the lender.

How long does the application process take for inventory financing?

Although the application process may require a surplus of documents, the timeframe to secure inventory financing is typically not very lengthy. The timeframe is often dependent on the preparation of the applicant business, if the business owner has the necessary documents readily available, the application process will usually be much quicker. Recently, with the increase of Internet services that offer inventory finance options, finding the right inventory financing loan is easier than ever. One factor that might influence the speed of application decisions is the type of inventory being purchased. The inventory lender must complete a field audit to assess the value of the inventory, the time frame might be extended before the borrowing business obtains a decision.

How would you use inventory financing?

Businesses use inventory financing to free up cash flow that is held up via inventory that has yet to be sold. This type of financing is especially beneficial for businesses that turn over high quantities of especially valuable inventory because it allows businesses to receive funds immediately based on the value of the inventory on their shelves and the inventory they are attempting to purchase for the future. Inventory financing is used to cover different expenses that may arise and allows business owners to take advantage of new business opportunities by providing an influx of working capital immediately.

Is collateral required for inventory financing?

Yes, inventory financing is a specific asset-based lending product. The collateral required for inventory financing is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.
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